BNM governor departure adds uncertainty to economy in flux

KUALA LUMPUR: The sudden resignation of Malaysia's central bank governor adds another layer of uncertainty to the economy following last month's unexpected change in government.

Muhammad Ibrahim's departure this week has left Bank Negara Malaysia without a leader at a time of the country's biggest political upheaval in decades, and as policy makers in emerging markets grapple with heightened volatility and the threat of a global trade war.

A successor hasn't been named yet, but local media reports say former deputy governor Nor Shamsiah Mohd Yunus may get the job.

Investors are already dealing with uncertainty around the budget after Prime Minister Tun Dr Mahathir Mohamad followed through with a campaign pledge and scrapped a 6 per cent goods-and-services tax, putting pressure on government revenues and triggering concern about a credit-rating downgrade.

The growth outlook is also unclear: consumers will get a temporary boost from the tax move but the government's pledge to review large-scale investment projects may slow spending.

Some analysts say the administration's moves could prompt the next governor to tweak the monetary policy stance. The central bank raised rates in January, and left borrowing costs unchanged twice since then. Policy makers are due to meet again in July.

Language Change

"Our view is the possibility of more dovish language with regards to interest-rate policy as the political landscape continues to unfold with greater clarity over the next few months," said Ray Choy, head treasury strategist at CIMB Bank in Kuala Lumpur. "All in, the review of mega-projects and zerorised GST should lower GDP growth and inflation which could lead to a dovish stance."

Others are more sanguine and predict continuity at one of the country's most respected institutions.

"The reason why the governor's resignation is not a catastrophe is that his departure is highly unlikely to jeopardise or destabilise the BNM's policy," said Vishnu Varathan, head of economics and macro strategy at Mizuho Bank Ltd. in Singapore. "Point being, no monetary policy response is required given inflation is well-contained while fiscal slippage risks are overstated."

All of this is coming against the backdrop of a slide in emerging markets, prompted by rising US interest rates and a stronger dollar. Malaysia has fared better than some of its Asian counterparts, with the currency up 1.8 per cent against the dollar this year, but the nation's higher debt levels make it vulnerable.

Negative Image

The government accepted Muhammad's offer to resign, which he said was to protect the central bank's image and reputation. Questions had been raised about the central bank's purchase of land from the previous administration and the subsequent use of the proceeds to repay debt at scandal-plagued state fund 1MDB.

In late 2016, Muhammad implemented curbs on some foreign-exchange trading that drew criticism from currency traders and worsened the ringgit slump. The sudden restriction on the ability of foreign investors to hedge their positions hurt sentiment toward the government bond market and contributed to surging yields.

The move to clamp down on offshore forwards also raised the specter of capital controls which Malaysia employed in the late 1990s, fears the central bank called "baseless". Later, it allowed investors to fully hedge their currency exposure and eased rules to let all domestic players short-sell government bonds.

"International investors would be hoping for a gradual phasing out of the forex administration rules implemented during Muhammad Ibrahim's time which will boost markets liquidity and ease foreign investors' concerns of a constricted capital market," Choy said.--BLOOMBERG